Das-speak: ‘Need to watch out if demand sustains’

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November 27, 2020 8:20 AM

The financing conditions in the commercial paper and corporate bond market also deteriorated, reflecting overall market conditions as well as generalised risk aversion.

Internationalisation of financial markets can lower transaction costs with efficiency gains, Das said.Internationalisation of financial markets can lower transaction costs with efficiency gains, Das said.

The sustainability of demand after the festive season must be watched as downside risks to growth persist amid a surge in infections, Reserve Bank of India (RBI) governor Shaktikanta Das cautioned on Thursday.

Das also observed India’s capital account is now convertible to a large extent.

The governor noted that even as the growth outlook has improved, downside risks to growth continue due to recent surge in infections in advanced economies and parts of India. “We need to be watchful about the sustainability of demand after festivals and a possible reassessment of market expectations surrounding the vaccine,” he cautioned.

The governor was speaking at an event organised by the Foreign Exchange Dealers’ Association of India (Fedai).

The monetary policy guidance in October emphasised the need to see through temporary inflation pressures and also maintain the accommodative stance at least during the current financial year and into the next. The monetary policy committee (MPC) will hold its next meeting between December 2-4.

After witnessing a sharp contraction in GDP by 23.9% in Q1FY21 and a multi-speed normalisation of activity in Q2, the Indian economy has exhibited a stronger-than-expected pick-up in the momentum of recovery. The global economy has also witnessed a stronger-than-expected rebound in activity in Q3. The International Monetary Fund (IMF) has accordingly revised its assessment for global growth in 2020 to a less severe contraction than what was assessed in June 2020.

The governor said a key source of resilience in recent months has been the comfortable external balance position of India supported by surplus current account balances over two consecutive quarters, resumption of portfolio capital inflows on the back of robust foreign direct investment (FDI) inflows, and sustained build-up of foreign exchange reserves. “The government’s recent policy focus to enhance India’s participation in global value chains, including through production-linked incentives for targeted sectors, can leverage on the strong external balance position of India,” he said.

Internationalisation of financial markets can lower transaction costs with efficiency gains, Das said. Over the last three decades, India has undergone a transformation from being a virtually closed economy to one that is globally connected and open to a much larger volume of international transactions and capital flows than before.

“Today, the capital account is convertible to a great extent. Inward FDI is allowed in most sectors and outbound FDI by Indian incorporated entities is allowed as a multiple of their net worth,” he observed.

Capital account convertibility will continue to be approached as a process rather than an event, taking cognisance of prevalent macroeconomic conditions. “A long-term vision with short- and medium-term goals is the way ahead,” Das added.

Domestic financial market conditions were benign at the start of the year but witnessed severe stress and dislocation as the Covid-19 pandemic unfolded. Thinning out of activity impacted market liquidity. Increased volatility of financial prices was observed across most asset classes. Yields hardened in the government securities market and the yield curve steepened sharply amidst concerns about fiscal slippage and sustained sell-off by FPIs, the governor said.

The financing conditions in the commercial paper and corporate bond market also deteriorated, reflecting overall market conditions as well as generalised risk aversion. The rupee sharply depreciated, with increasing volatility and heightened forward premia. RBI and market participants have been able to ensure stable and resilient markets across all segments.

“The Reserve Bank remains committed to fostering orderly functioning of financial markets and will continue to evaluate incoming information having a bearing on the financial markets and act, as needed, to mitigate any downside risks,” Das said.

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